Fund query: The need for a core and a satellite portfolio

Gajanan

Here are a few observations about your portfolio. You currently invest about 77 per cent of your corpus in higher-risk pure equity funds and 23 per cent in lower-risk aggressive hybrid (SBI Equity Hybrid) and debt (SBI Medium Duration) categories. This allocation suits someone with a high risk appetite. Since you also invest in direct equities, we assume you are comfortable with this allocation.

All your funds, barring the two small-cap schemes, are rated 5-star by BusinessLine Portfolio Star Track MF Ratings , and you can continue your SIPs in them. Note that SIPs are used for cost-averaging and work well for equity funds that are subject to market volatility. It is not the same for debt funds. However, if you want to hold on to a regular savings habit through SIPs even in the debt portion of your portfolio, you can continue using the SIP route.

You currently invest ₹5,000 a month (₹60,000 a year) in equity-linked savings schemes (ELSS). Since you are also investing in PPF, and may have other savings/expenses such as insurance premium payments eligible for 80C deduction, your ELSS component need not be more than what is needed to reach the ₹1.5-lakh deduction limit under Section 80C.

As far as the small-cap funds go, while HDFC Small Cap is rated 3-star , the ABSL counterpart is rated 2-star. Instead of putting in ₹1,000 in each of these funds, you can invest ₹2,000 in either SBI Small Cap or Nippon Small Cap.

With regards to saving for your child’s higher education, you can add to the SIPs in the existing funds in the large- and flexi-cap categories.

You are right in having a long-term investment horizon. This helps in building a corpus for goals such as making down-payment for a house, saving for a child’s higher education and saving for your retirement. But for your investments to go through market ups and downs and get the benefit of compounding, it is best that you don’t keep withdrawing from the long-term savings bucket.

You can create a core portfolio of funds for long-term goals, which you can leave untouched, and a satellite portfolio with funds where you can book profits to meet your intermittent needs. This satellite portfolio can be used for any expenses that may come up on and off, such as your child’s school education. The fund choices for the satellite portfolio should be based on the time horizon for the expense. You can even do lump-sum investments for these short- to medium-term needs as and when you have any surplus. To benefit from this strategy, you need to watch these investments closely and exit at the right time.

As different asset classes such as debt, equity and gold outperform each other at different points in time, asset allocation is a basic tenet of investment. You have done well to invest in mutual funds and PPF, which is one of the best long-term debt instruments to invest in. If your wife is not too risk averse, she can also explore the mutual fund route for long-term savings. Else, PPF is a good route for her, too. FD rates often do not beat inflation — saving only through FDs may be a sub-optimal choice.

While her decision to invest in savings bonds — assuming it is RBI Floating Rate Bonds — may not be a bad idea per se, note that there is no option to compound the interest here. Regular interest payouts from this, unless reinvested in other compounding instruments, may not be an ideal way to build long-term savings, especially for people who are employed and don’t depend on interest payouts to meet their routine expenses.

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